Tesla’s losses are piling up despite record unit sales

In its quarterly earnings report (pdf) on July 24, the electric car maker slid firmly back into the red, posting a $408 million loss for the second disappointing quarter this year. Despite the company delivering a record number of vehicles this quarter— 87,048 built and 95,356 deliveries—Tesla’s profitable quarters at the end of 2018 have proved to be a mirage. CEO Elon Musk had promised the firm would be profitable by this point. During a call this February, Musk told journalists, “We do not expect to be profitable in Q1, but we do expect to be profitable in Q2,” adding the Model 3’s $35,000 base price was making it “excruciatingly difficult…to be financially sustainable.”

Yet Tesla repeated (pdf) predictions today of a positive GAAP net income next quarter with the caveats that “continuous volume growth, capacity expansion, and cash generation will remain the main focus.” UPDATE: Tesla CEO Elon Musk also announced Tesla’s chief technology officer JB Straubel will move to an advisory role. Drew Baglino, vice president of technology at Tesla and employee since 2006, will be the next CTO.

By most accounts, the carmaker should be having a banner year. Tesla produced more cars last quarter than at any point in its history. Its Model 3 is crushing the competition. It was America’s best-selling premium car last quarter, and tallied nearly $9 billion in sales last year (pdf), making it America’s top-grossing car, beating even the Toyota Camry and Honda Accord. The Model S, first released in 2012, is now years without a refresh yet is still lashing premium sedan rivals such as Mercedes, Lexus, and BMW’s 6 and 7 series.

But Tesla has taken a beating as its margins fell due to price discounts and leasing costs, as well as logistical expenses as more Model 3s were shipped to Europe and Asia. Analysts were expecting gross margins between 21% to 23%. Instead, Tesla delivered 18.9% compared to 24.7% in the fourth quarter of last year. That’s more red meat for the bear case against the company.

During the earnings call, Tesla’s CFO Zachary Kirkhorn noted that the company’s long-term picture is rosier than it might appear. “If we take a step back here, I think it’s important to remember that Tesla is on a long-term journey, and it’s difficult to see the full picture looking quarter-to-quarter,” he said according to a transcript from Sentieo. “Ultimately, the Model 3 is accomplishing what our business needs it to do. It expanded our sales and customer base, enabling us to generate cash we need to reinvest.”

Tesla is now battling to squeeze margins from its popular vehicles even as it makes them in greater and greater volumes. It’s hoping manufacturing efficiencies, cheaper battery packs, and streamlined Model 3 logistics from its “gigafactory” in China will help. Meanwhile, demand for its high-end offerings in North America is eroding. The Model 3 has enjoyed a warm reception worldwide, but it’s taking away from demand for the more expensive Model S sedan and Model X SUV. Buyers appear to be opting for the premium Model 3 (average selling price $50,000) instead. California, a bellwether market for Tesla, saw new Model S registrations fall 54% to 1,205 in the second quarter, according to the Dominion Cross-Sell report, which compiles data from state motor-vehicle records.

Yet Tesla believes it can’t afford to stay small. Big automakers are all battling it out over scale. As long as Tesla has world-beating ambitions, volume is the only path to survival. The majors are all busy tying up their operations—Ford and VW, Honda and GM—to capture economies of scale and lower the operating cost in a cutthroat business.

Tesla has none of those advantages. Its only car factory, in Fremont, California, is already splitting at the seams. In 2018, the company resorted to building its latest assembly line in a tent in the parking lot. Its new factory in China is moving along, but won’t come online until the end of this year. A new European factory hasn’t even been sited yet.

As for costs, Tesla is learning as it goes. Its proving to be a very expensive lesson. While ramping up the Model 3, Musk demanded a fully automated “alien dreadnought,” which ended in a costly boondoggle. With production deadlines blown, the company was forced to rip out assembly lines and rush six planeloads of German robots at eye-watering expense to make up for delays.

The company issued a mea culpa in January when Musk acknowledged to investors the only way forward for Tesla was to slash expenses until more people could afford EVs. “It’s cost, cost, cost,” said Musk about Tesla’s operations. “I think this past year, while extremely difficult, has driven us to a high level of financial discipline. I think we’re way smarter about how we spend money and we’re getting better with each passing week.”

Its saving grace may be that the big automakers aren’t exactly hitting home runs. Audi, VW, and Ford are all scrambling—often stumbling—to keep pace as the automobile enters the electric age.

While Tesla’s polish often disappoints (customers complain of long waits for maintenance and ill-fitting components), other automakers have yet to compete head-to-head with Tesla on specs, style, and price. Take Porsche. The 88-year-old luxury sports brand will soon release its €150,000 ($167,000) Taycan Turbo EV. The putative Tesla killer is a nicer car on the outside, UBS analysts noted, but it still can’t beat Tesla’s Model S, which is half the price, on acceleration and speed. Porsche is not alone. Mercedes and BMW still have no plans for a dedicated EV architecture. “We find it intriguing that not even a leading sports car producer could beat Tesla on key metrics,” UBS stated in a recent research note.

Tesla claims it’s now in a “comfortable position” (pdf). The company reaffirmed its forecast of 360,000 to 400,000 vehicle deliveries this year and profits by next quarter. With $5 billion in cash, a new gigafactory on the way in China, and $614 million in free cash flow this quarter thanks to “growth and operational improvements,” Tesla sounded an optimistic note. Investors, however, were less sanguine, sending the stock down 10% in after-hours trading.